Schneider/Legrand

A shocking denouement

Why it does not pay to second-guess Europe's antitrust regulators

RARELY has a merger been so accident-prone. When Schneider announced its euro7.2 billion ($6.6 billion) takeover of Legrand, a local French rival, in January, it created the world's biggest maker of household electrical equipment and won plaudits for reshaping an industry. From there it has been downhill all the way. A bust-up in the spring led to legal challenges from holders of preference shares, forcing Schneider to add a cash sweetener to its all-share offer. That was as nothing compared with the knock-out blow this week: the European Commission blocked the deal, claiming it would harm competition.

This would be bad enough in any circumstances. What makes it disastrous for the companies is that they have already merged. They will now have to prise themselves apart, with great difficulty and at great cost. They had charged into each other's arms, confident that regulators would wave the deal through. But executives grossly underestimated the concerns it would raise, and they were also caught out by a legal quirk: in France, merger agreements cannot be made conditional on antitrust approval.

Things started to go wrong in September when the commission's experts latched on to the new company's dominant position in various national markets for such things as circuit breakers, which are required by law in homes and factories. The regulators had taken soundings from Schneider's rivals, such as Germany's Siemens, which argued that the merger would lead to higher prices. Schneider then offered to sell businesses with turnover of euro400m, and lobbied frantically to salvage the deal. So did France's politicians, who had been looking forward to the creation of a new national champion: President Jacques Chirac even put in a call to Romano Prodi, the commission's president. He received the same polite but firm reply as those American politicians who pressed the commission on behalf of GE and Honeywell earlier this year.

Schneider is clearly shocked by the decision, calling it “incomprehensible”. It claims that the commission gave no hint that it would object on principle—a charge that Mario Monti, the competition commissioner, has strongly denied. Schneider's options are now equally awful: either to sell Legrand to a rival, or to relist it on the stockmarket. Analysts calculate that Schneider is likely to lose euro2 billion-3 billion on the sale, even if regulators give it a few months' breathing-space. The commission has not completely ruled out renegotiation of the deal, though few think this likely.

Once they break apart, Schneider and Legrand will both become takeover targets. Possible buyers include Tyco and Emerson, both American. Siemens is less keen to expand in this area, but it may be tempted by a fire-sale price. There is even talk of a bid from GE or Honeywell. It would be ironic were Mr Monti inadvertently to help either of the duo whose marriage plans he broke up so spectacularly only a few months ago.